An appetite for returns

With the restaurant sector cooking, IPOs are making noise

It's abundantly clear that Americans like to eat out. The nation's restaurants are expected to rack up sales of $511 billion this year, compared with $185 billion two decades ago.

But are they willing to put their money where their mouths are by investing in restaurant stocks?

It seems so, based on the market's sizzling endorsement Thursday of Chipotle Mexican Grill Inc., which had been a wholly owned subsidiary of Oak Brook-based McDonald's Corp.

Chipotle went to market with its initial public offering Wednesday, pricing the shares at $22, significantly above earlier estimates. On Thursday, their first day of trading, shares closed at $44.

But it remains to be seen whether investors will scoop up other restaurant stocks coming to market.

Morton's Restaurant Group Inc., which got its start in Chicago, filed for an IPO on Monday, with the offering expected within weeks.

Elsewhere, Wendy's International Inc. in December filed to sell 15 to 18 percent of its Tim Hortons coffee and doughnut chain.

"What we're having now is an interesting window," said Allan Hickok, a Minneapolis-based industry consultant. "There is a lot of confidence in retail stocks, and restaurant stocks in particular."

Restaurant share prices are up 11 percent in the past year, said John Owens, an equity analyst with Morningstar Inc. "Overall, it looks like a pretty good time to come to market."

But if a trend's afoot, it's a bit too early to call it.

For the past decade, restaurant IPO activity has been a mere trickle, maybe three to five offerings a year, noted John Hamburger, president of Franchise Times Corp., the Minneapolis-based publisher of the Restaurant Finance Monitor and Franchise Times.

"The last time there was a boom was 1996, when there were 18," he said. And before that, there was a big rush in 1983-85.

"That's where the action was," he said. "This is not action."

Private deals abound

Instead, private equity firms are going after restaurant deals in a big way, he said.

Last year there were 28 private deals, together worth more than $6.4 billion, he said. In contrast, there were three IPOs, which together raised only $275 million.

"The stock market has been so-so the last four to five years, so institutions and individuals are looking at alternate places to get return, and one is real estate and the second is private equity," Hamburger said.

As well, the 2002 Sarbanes-Oxley corporate governance legislation "made it expensive and difficult for small to medium-size companies to go public," he said.

The restaurant IPOs that do come to market are so few that "they make a noise," he said.

Denver-based Chipotle is making a big noise. On Monday it raised its estimated price range to $18 to $20 per share, from an earlier estimate of $15.50 to $17.50. And then Wednesday evening, shares were priced at $22, bringing the potential value of the 7.9 million-share offering to $173.8 million.

Demand for Chipotle appears to be driven, at least in part, by the brand name and the fact that the business has been under McDonald's wing, he said. McDonald's will own about 88 percent of the chain after the IPO.

As well, "the Mexican concept is gaining a wide audience," Peterson said.

The risk, said Hamburger, is that Chipotle faces a huge range of competitors.

"The segment has been overbuilt," he said.

Mixed track record

The track record for restaurant IPOs has been mixed.

P.F. Chang's has been a colossal home run, with the stock price now trading more than 700 percent above the offering price, according to Thomson Financial.

But then there have been fad restaurants, such as Planet Hollywood, which went bankrupt.

"Shareholders were wiped out," said Peterson.

Investors are advised to look beyond big brand names.

"Examine the company," said Morningstar's Owens.

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Investors eat up restaurant stocks

Chipotle Mexican Grill's IPO garnered enough interest to raise the final offering price significantly from its original estimate. Overall, the restaurant sector is up about 13 percent from a year ago.